UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 1
X ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to ___________.
Commission file number 0-29651
USA VIDEO INTERACTIVE CORP.
(Exact name of registrant as specified in its charter)
WYOMING
06-1576391
(State or Other Jurisidiction of
(I.R.S. Employer Identification No.)
Incorporation of Organization)
83 Halls Road, PO Box 245, Old Lyme, Connecticut
06371
(Address of principal executive offices)
(ZIP Code)
Registrant’s telephone number, including area code:
(860) 434-5535
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant as required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
Accelerated Filer
Non-accelerated filer
X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No X .
State the aggregate market value of the voting and non-voting equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $11,381,207
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 145,123,096.
Documents Incorporated by Reference: NONE
EXPLANATORY NOTE
This Amendment No. 1 to the Annual Report on Form 10-K of USA Video Interactive Corp. (the “Company’) amends the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, originally filed with the Securities and Exchange Commission on March 22nd, 2006 (the “Original Filing”).
The Company is filing this Amendment No. 1 solely to correct a typographical error by our filing agent in the process of converting and formatting the Form 10-K to an electronic format suitable for filing with the Securities and Exchange Commission. A typographical error appeared on the balance sheet contained in Item 8. Financial Statements. The amount of the cash on hand was incorrectly stated as $2,253 and has been corrected to state $25,253. We are also updating the signature page and Exhibits 31.1, 31.2, 32.1 and 32.2
Except as described above, no other changes have been made to the Original Filing. This Amendment No. 1 does not amend or update any other information set forth in the Original Filing, and the Company has not updated disclosures contained therein to reflect any events that occurred at a date subsequent to the filing of the Original Filing.
Item 8. Financial Statements and Supplementary Data.
USA VIDEO INTERACTIVE CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
F-2
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
F-3
Consolidated Financial Statements:
Balance Sheets
F-4
Statements of Operations
F-5
Statements of Stockholders' Equity (Deficiency)
F-6
Statements of Cash Flows
F-7
Notes to ConsolidatedFinancial Statements
F-8 - F-22
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
USA Video Interactive Corp.
We have audited the accompanying consolidated balance sheets of USA Video Interactive Corp. and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity (deficiency), and cash flows for each of the three years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the financial position of USA Video Interactive Corp. and Subsidiaries as of December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has not generated significant revenue from operations and has a net working capital deficiency and a stockholders’ deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 7, 2006
Comments by Auditors for Canadian Readers on U.S. – Canada Reporting Differences
In Canada, reporting standards for auditors do not require the addition of an explanatory paragraph (following the opinion paragraph) or a reservation of opinion when the consolidated financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern. Such doubt is accounted for and disclosed in accordance with United States generally accepted accounting principles.
Our report to the Board of Directors dated March 7, 2006, is expressed in accordance with the standards of the Public Company Accounting Oversight Accounting Board (United States), which requires an explanatory paragraph in the auditor’s report.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
March 7, 2006
See Notes to Consolidated Financial Statements
F-4
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES | ||
CONSOLIDATED BALANCE SHEETS | ||
December 31, | 2005 | 2004 |
ASSETS | ||
Current Assets: | ||
Cash and cash equivalents | $ 25,253 | $ 9,341 |
Prepaid expenses and other current assets | 9,825 | 18,536 |
Total current assets | 35,078 | 27,877 |
Property and Equipment - at net | - | - |
Intangible assets, net | 35,181 | 38,504 |
Prepaid rent | 19,340 | 23,120 |
Deferred Tax Assets, net of valuation allowance of $8,824,000 and | ||
$8,517,000, respectively | - | - |
Total Assets | $ 89,599 | $ 89,501 |
LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||
Current Liabilities: | ||
Accounts payable and accrued expenses | $ 314,729 | $ 556,714 |
Due to related parties | 160 | 160 |
Total current liabilities | 314,889 | 556,874 |
Commitments and Contingencies | ||
Stockholders' Deficiency: | ||
Preferred stock - no par value; authorized 250,000,000 shares, none issued | ||
Common stock and additional paid-in capital - no par value; authorized 250,000,000 | ||
shares, issued and outstanding 145,073,088 and 130,435,088 shares, respectively | 34,010,651 | 32,810,318 |
Accumulated deficit | (34,235,941) | (33,277,691) |
Stockholders' deficiency | (225,290) | (467,373) |
Total Liabilities and Stockholders' Deficiency | $ 89,599 | $ 89,501 |
See Notes to Consolidated Financial Statements
F-5
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES | ||||
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||
Year ended December 31, | 2005 | 2004 | 2003 | |
Revenue | $ 18,800 | $ 4,700 | $ 3,920 | |
Expenses: | ||||
Cost of sales | 5,000 | 3,379 | 2,885 | |
Research and development | 168,571 | 276,302 | 66,350 | |
Selling, general and administrative | 1,043,440 | 1,124,609 | 628,180 | |
Depreciation and amortization | 3,323 | 3,323 | 19,391 | |
Impairment loss on long-lived assets | - | - | 100,246 | |
Total expenses | 1,220,334 | 1,407,613 | 817,052 | |
Loss from operations | (1,201,534) | (1,402,913) | (813,132) | |
Other income (expense), net: | ||||
Interest income (expense) (net of interest income | ||||
of $208, $102 and $149, respectively) | (197) | (1,639) | (12,722) | |
Gain on settlement of accounts payable | 243,481 | 214 | 89,159 | |
Gain on sale of equipment | - | 500 | 24,626 | |
Other | - | - | 14,657 | |
| 243,284 | (925) | 115,720 | |
|
|
| ||
Net loss | $ (958,250) | $(1,403,838) | $ (697,412) | |
Net loss per share - basic and diluted | $ (.01) | $ (.01) | $ (.01) | |
Weighted-average number of common shares outstanding - | ||||
basic and diluted | 136,985,153 | 122,737,060 | 110,020,144 | |
See Notes to Consolidated Financial Statements
F-6
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) |
Common Stock and | Stockholders' | |||
Additional Paid-in Capital | Accumulated | Equity | ||
Shares | Amount | Deficit | (Deficiency) | |
Balance at January 1, 2003 | 103,745,088 | $ 30,357,906 | $(31,176,441) | $ (818,535) |
Issuance of common stock and common warrants | ||||
for cash | 8,750,000 | 655,877 | - | 655,877 |
Issuance of common stock upon exercise of warrants | 3,476,000 | 308,538 | - | 308,538 |
Noncash compensation charges | - | 14,430 | - | 14,430 |
Net loss | - | - | (697,412) | (697,412) |
|
|
|
|
|
Balance at December 31, 2003 | 115,971,088 | 31,336,751 | (31,873,853) | (537,102) |
Issuance of common stock and common | ||||
stock warrants for cash | 1,250,000 | 212,500 | - | 212,500 |
Issuance of common stock upon exercise of warrants | 13,214,000 | 1,102,107 | - | 1,102,107 |
Noncash compensation charges | - | 158,960 | - | 158,960 |
Net loss | - | - | (1,403,838) | (1,403,838) |
Balance at December 31, 2004 | 130,435,088 | 32,810,318 | (33,277,691) | (467,373) |
Issuance of common stock and common | ||||
stock warrants for cash | 12,875,000 | 825,375 | - | 825,375 |
Issuance of common stock upon exercise of warrants | 1,613,000 | 120,898 | - | 120,898 |
Issuance of common stock upon exercise of stock options | 150,000 | 37,500 | - | 37,500 |
Noncash compensation charges | - | 216,560 | - | 216,560 |
Net loss | - | - | (958,250) | (958,250) |
|
|
|
|
|
Balance at December 31, 2005 | 145,073,088 | $ 34,010,651 | $(34,235,941) | $ (225,290) |
See Notes to Consolidated Financial Statements
F-7
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES | |||
CONSOLIDATED STATEMENTS OF CASH FLOWS | |||
Year ended December 31, | 2005 | 2004 | 2003 |
Cash flows from operating activities: | |||
Net loss | $ (958,250) | $(1,403,838) | $ (697,412) |
Adjustments to reconcile net loss to net cash used in operating | |||
activities: | |||
Depreciation and amortization | 3,323 | 3,323 | 19,391 |
Impairment loss on long-lived assets | - | - | 100,245 |
Gain on sale of equipment | - | (500) | (24,626) |
Gain on settlement of accounts payable | (243,481) | (214) | (89,159) |
Noncash compensation charge | 216,560 | 158,960 | 14,430 |
Changes in operating assets and liabilities: | |||
Decrease in accounts receivable | - | 1,400 | - |
Decrease (increase) in prepaid expenses and other current assets | 8,711 | (1,791) | (6,172) |
Decrease (increase) in prepaid rent | 3,780 | (23,120) | - |
Increase (decrease) in accounts payable and accrued expenses | 1,496 | (89,591) | (346,821) |
Decrease in due to related parties | - | (2,961) | (50,059) |
Net cash used in operating activities | (967,861) | (1,358,332) | (1,080,183) |
Cash flows from investing activities: | |||
Proceeds from equipment sales | - | 500 | 119,626 |
Proceeds from sale of investments - related parties | - | - | - |
Net cash provided by investing activities | - | 500 | 119,626 |
Cash flows from financing activity - proceeds from the | |||
issuance of common stock and warrants | 983,773 | 1,314,607 | 964,415 |
Net cash provided by financing activities | |||
Net increase (decrease) in cash and cash equivalents | 15,912 | (43,225) | 3,858 |
Cash and cash equivalents at beginning of year | 9,341 | 52,566 | 48,708 |
Cash and cash equivalents at end of year | $ 25,253 | $ 9,341 | $ 52,566 |
Supplemental disclosures of cash flow information: | |||
Cash paid during the year for interest | $ 587 | $ 1,847 | $ 12,824 |
See Notes to Consolidated Financial Statements
F-8
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS: | USA Video Interactive Corp. (the "Company") is a designer of high-tech Internet streaming video-on-demand systems, services and solutions. At December 31, 2005 and for the three-year period then ended, substantially all of the Company's assets and substantially all its operations are located and conducted in the United States. |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: | The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the financial statements, the Company has incurred losses of $958,250, $1,403,838 and $697,412 for the years ended December 31, 2005, 2004 and 2003, respectively. In addition, the Company has a working capital deficiency of approximately $280,000 and a stockholders’ deficiency of approximately $225,000 at December 31, 2005. These conditions raise doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate sufficient revenue and cash flow to meet its obligations as they come due, which management believes it will be able to do. To date, the Company has funded operations primarily through the issuance of co mmon stock and warrants to outside investors and to the Company's management. The Company believes that its operations will generate additional funds and that additional funding from outside investors and the Company's management will continue to be available to the Company when needed. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary in the event the Company cannot continue as a going concern. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses on these accounts. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Deferred rent represents payments made to a landlord at the inception of the lease. The amount is being amortized over the term of the lease (5 years). |
F-9
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment is stated at cost. Maintenance and repairs are expensed as incurred. When property is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in operations. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Intangible assets consist of patents and patents pending owned by the Company for the Store and Forward Video System. The patents and patents pending are recorded at cost and are being amortized on a straight-line basis over 17 years. At each balance sheet date, the Company evaluates the impairment of intangible assets. The factors used in evaluating the period of amortization include: (i) current operating results, (ii) projected future operating results, and (iii) other material factors that affect the continuity of the business and economic life of the asset. Revenue from hardware product sales is recognized when the product has been shipped and the collection of payment is reasonably assured. Revenue recognized from these sales is net of applicable provisions for refunds, discounts and allowances. Engineering services sales are recognized upon the service having been provided. Revenue from software sales is recognized when the product has been delivered. Revenue from multiple element contracts (hardware, software and engineering) is allocated to the various elements based on fair value. If objective evidence of fair value is not available, revenue from these contracts is deferred until the earlier of when objective evidence of fair value does exist or all elements of the contract have been delivered. Discounts will be applied to each element on a proportionate basis. No portion of the revenue will be recognized if the portion of the revenue allocable to delivered elements is subject to forfeiture, refund or other concession. Research and development costs are expensed as incurred. The Company has elected to apply APB Opinion No. 25,Accounting for Stock Issued to Employees("APB Opinion No. 25"), and related interpretations in accounting for its stock options and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,Accounting for Stock-Based Compensation. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123, the Company's net loss and net loss per common share for the years ended December 31, 2005, 2004 and 2003 would have been as follows: |
F-10
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31 | 2005 | 2004 | 2003 | |
Net loss As reported | $ (958,250) | $(1,403,838) | $ (697,412) | |
Add: Stock compensation expense included in reported net loss | 41,000 | 53,250 | - 0 - | |
Deduct: Total stock based compensation expense determined under fair value based method for all awards | (350,750) | (867,143) | - 0 - | |
Pro forma | $ (1,268,000) | $(2,217,731) | $ (697,412) | |
Loss per common share Basic and diluted: As reported | $ (.01) | $ (.01) | $ (.01) | |
Pro forma | $ (.01) | $ (.02) | $ (.01) | |
The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: | ||||
Year ended December 31 | 2005 | 2004 | 2003 | |
Expected dividend yield | - 0 - | - 0 - | N/A | |
Risk-free interest rate | 3.23% | 3.04% | N/A | |
Volatility | 144% | 144% | N/A | |
Expected life (years) | 2 | 2 | N/A | |
F-11
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are recorded based on the temporary differences between the financial statement and the tax bases of assets and liabilities and for operating loss carry forwards measured using the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company periodically evaluates the reliability of its net deferred tax assets and records a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. | |
The assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at current exchange rates, and revenue and expenses are translated at average rates of exchange prevailing during the period. The aggregate effect of translation adjustments is immaterial at December 31, 2005 and 2004. Basic loss per common share ("EPS") is computed as net loss divided by the weighted-average number of common shares outstanding during the period. Diluted EPS includes the impact of common stock potentially issuable upon the exercise of options and warrants. Potential common stock amounts of approximately 26,824,000, 10,407,000 and 17,431,000 for the years ended December 31, 2005, 2004 and 2003, respectively, have been excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based Payments" (“SFAS 123(R)"). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective for the beginning of thefirst quarter of the Company's 2006 fiscal year. The new standard allows for two transition alternatives, either the modified-prospective method or the modified retrospective method. The Company has not completed its evaluation of SFAS 123(R) and therefore has not selected a transition method or determined the impact that adoption SFAS 123(R) will have on its results of operations. Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements. |
F-12
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MAJOR CUSTOMERS: | During the years ended December 31, 2005, 2004 and 2003 one customer accounted for 100% of total revenue. | ||
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS: | Prepaid expenses and other current assets consist of the following: | ||
December 31, | 2005 | 2004 | |
Prepaid Rent | $5,845 | $13,380 | |
Taxes Receivable | 3,578 | 4,754 | |
Other (none in excess of 5% of current assets) | 402 | 402 | |
$9,825 | $18,536 | ||
5. INTANGIBLE ASSETS: | Intangible assets consist of the following: |
Gross Carrying Amount | Accumulated Amortization | ||
Patents and patents pending | $56,488 | $21,307 | |
Aggregate Amortization Expense: For the year ended December 31, 2005 | $3,323 | ||
Estimated Amortization Expense: For the year ending December 31, | |||
2006 | $3,323 | ||
2007 | 3,323 | ||
2008 | 3,323 | ||
2009 | 3,323 | ||
2010 | 3,323 |
6. PROPERTY AND EQUIPMENT: | Property and equipment, at cost, consists of the following: |
December 31, | 2005 | 2004 | Estimated Useful Life | |
Office Equipment | $ 16,069 | $ 16,069 | 5 years | |
Less accumulated depreciation | 16,069 | 16,069 | ||
$ - 0 - | $ - 0 - |
F-13
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense amounted to $-0-, $-0- and $16,069 for the years ended December 31, 2005, 2004 and 2003, respectively. During the year ended December 31, 2003, the Company recorded impairment losses of approximately $100,000 (Note 12). At December 31, 2003 as a result of the Company recording an impairment loss, the cost of the property and equipment has been adjusted to reflect the new carrying amount. |
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES | Accounts payable and accrued expenses consist of the following: | ||
December 31, | 2005 | 2004 | |
Accounts payable | $ 163,286 | $ 187,301 | |
Accrued professional fees | 75,715 | 55,584 | |
Accrued payroll and related tax withholdings | 63,125 | 282,426 | |
Deferred revenues | -0- | 18,800 | |
Amounts due for purchased computer equipment | 12,603 | 12,603 | |
$ 314,729 | $ 556,714 | ||
8. COMMITMENTS AND CONTINGENCIES: | The Company leases its Canadian office space under a non-cancelable operating lease, expiring in March 2009. The minimum rental commitment of this lease is approximately $20,000. The Company leases its United States office space on a month-to-month lease. Rent expense amounted to $43,044, $44,975 and $42,215 for the years ended December 31, 2005, 2004 and 2003, respectively. On April 10, 2003, the Company announced that a subsidiary had filed a lawsuit in U.S. District Court for the District of Delaware against Movielink, LLC. The Company alleges that Movielink, a Delaware company, has infringed and continues to infringe on the Company’s patented online movie delivery System. On January 28, 2005, the Court issued an opinion and order granting summary judgment in favor of Movielink, based on the Court’s conclusion that the record contained insufficient evidence that the Movielink system “initiates connections” (a requirement for infringement of the Company’s patent) in light of the Court’s construction of the term “initiates.” The Company filed a motion for reconsideration on February 11, 2005, asking the Court to reconsider its ruling on that point, to decide the remaining aspects of the claim construction and the other pending motions, and to permit the Company’s case to proceed to trial. Movielink filed its opposition to the Company’s motion for the reconsideration on February 28, 2005. By order dated May 27, 2005, the Court denied our motion for reconsideration, thereby ending the litigation of substantive matters i n the District Court. The Company, through counsel (the Firm of Goldstein & Faucett, LLP), filed a Notice of Appeal with the U.S. District Court of Deleware and the appeal has been docketed at the U. S. Court of Appeals for the Federal Circuit. |
F-14
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is party to a default judgment entered against one of the Company's subsidiaries. During the year ended December 31, 1995, a claim was made against the Company for the total amount payable under the terms of a lease with one of the Company's subsidiaries for office space in Dallas, Texas through 2002. The Company's management is of the opinion that the amount payable under the terms of this judgment is not estimable or determinable at this time and may be substantially mitigated by the landlord’s renting the property to another party. The range of possible loss is from $-0- to approximately $500,000. Any settlement resulting from the resolution of this contingency will be accounted for in the period of settlement when such amounts are estimable or determinable. |
9. STOCK- HOLDERS' EQUITY: | On February 14, 2003, the Company issued 2,200,000 units to investors at a price of $0.0657 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.0657 per share. On February 14, 2003, the Company issued 550,000 units to employees at a price of $0.0657 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.0657 per share. The Company charged operations for approximately $2,400 representing the differential between the fair value and the purchase price of the common stock and for approximately $2,400 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants. On April 7, 2003, the Company issued 1,200,000 units to investors at a price of $0.068 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.075 per share. On April 7, 2003, the Company issued 300,000 units to employees at a price of $0.068 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.075 per share. The Company charged operations for approximately $3,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $900 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants. On May 30, 2003, the Company issued 1,300,000 units to investors at a price of $0.088 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.1175 per share. The Company charged operations for approximately $2,800 representing the differential between the fair value and the purchase price of the common stock. |
F-15
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 30, 2003, the Company issued 200,000 units to employees at a price of $0.088 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.1175 per share. On September 23, 2003, the Company issued 2,800,000 units to investors at a price of $0.08 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.095 per share. On September 23, 2003, the Company issued 200,000 units to employees at a price of $0.08 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.095 per share. The Company charged operations for approximately $3,000 representing the differential between the fair value and the purchase price of the common stock. From January 1, 2003 to December 31, 2003, the Company issued 3,476,000 shares of common stock upon the exercising of warrants with exercise prices ranging from $0.065 to $0.26 per common share. On January 12, 2004, the Company issued 400,000 units to investors at a price of $0.200 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.255 per share. On January 12, 2004, the Company issued 100,000 units to employees at a price of $0.200 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.255 per share. The Company charged operations for approximately $26,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $20,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants. On November 24, 2004, the Company issued 660,000 units to investors at a price of $0.15 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.195 per share. On November 24, 2004, the Company issued 90,000 units to employees at a price of $0.15 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at a price of $0.195 per share. The Company charged operations for approximately $5,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $1,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants. |
F-16
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From January 1, 2004 to December 31, 2004, the Company issued 13,214,000 shares of common stock upon the exercising of warrants with exercise prices ranging from $0.064 to $0.255 per common share. On February 24, 2005, the Company issued 1,350,000 units to investors at $.100 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.13 per share. On February 24, 2005, the Company issued 150,000 units to employees at $.100 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.13 per share. The company charged operations for approximately $3,000 representing the differential between the fair value and the purchase price of the common stock and for approximately $-0- representing the differential between the fair value of the underlying common stock and the exercise price of the warrants. On July 11, 2005, the Company issued 5,100,000 units to investors at $.055 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.08 per share. On July 11, 2005, the Company issued 500,000 units to employees at $.055 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.08 per share. The Company charged operations for approximately $17,500 representing the differential between the fair value and the purchase price of the common stock and for approximately $5,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants. On September 28, 2005, the Company issued 3,675,000 units to investors at $.065 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.084 per share. On September 28, 2005, the Company issued 500,000 units to employees at $.065 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.084 per share. The Company charged operations for approximately $12,500 representing the differential between the fair value and the purchase price of the common stock and for approximately $3,000 representing the differential between the fair value of the underlying common stock and the exercise price of the warrants. On December 7, 2005, the Company issued 1,600,000 units to investors at $.060 per unit. Each unit consisted of one share of common stock and one warrant to purchase an additional share of common stock at $.084 per share. |
F-17
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2005, the Company issued 1,613,000 shares of common stock upon the exercising of warrants with exercise prices ranging from $.0657 to $.1175 per common share and issued 150,000 shares of common stock upon the exercising of stock options with exercise price of $.25. In December 2004, the Company issued options to acquire 550,000 shares of common stock at $0.25 per share to consultants. The Company charged operations for the fair value of these options, approximately $106,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations. In January 2005, the Company granted 150,000 options to a director of the Company to purchase 150,000 shares at a price of $0.29 to January 2007. In April 2005, the Company granted 300,000 options to a consultant of the Company to purchase 300,000 shares at a price of $0.10 to April 2007. The Company charged operations for the fair value of these options, approximately $19,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations. In May 2005, the Company granted 1,000,000 options to a consultant of the Company to purchase 1,000,000 shares at a price of $0.10 to May 2007. The Company charged operations for the fair value of these options, approximately $53,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations. In June 2005, the Company amended previously granted options to purchase an aggregate of 5,000,000 shares of common stock granted to directors, employee and consultants of the Company to reduce the exercise price from $0.25 per share to $0.10 per share. No expense is recognized during the year ended December 31, 2005 since the strike price equals or exceeds the quoted market price. In July 2005, the Company granted 1,175,000 options to employees and a director of the Company to purchase 1,175,000 shares at a price of $0.10 to July 2007. |
F-18
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2005, the Company granted 500,000 options to consultants of the Company to purchase 500,000 shares at a price of $0.10 to July 2007. The Company charged operations for the fair value of these options, approximately $27,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations. In December 2005, the Company granted 3,100,000 options to directors of the Company to purchase 3,100,000 shares at a price of $0.10 to December 2007. In December 2005, the Company granted 1,710,000 options to consultants of the Company to purchase 1,710,000 shares at a price of $0.10 to December 2007. The Company charged operations for the fair value of these options, approximately $77,000, and this amount is included in selling, general and administrative expenses in the accompany statement of operations. |
10. STOCK OPTIONS AND STOCK WARRANTS: | The Company has a stock option plan under which options to purchase shares of common stock may be granted to certain officers, directors and service providers. In June 2001, the Company adopted a new Stock Option Plan (the "2001 Plan"). The 2001 Plan authorizes the issuance of up to 8,400,000 of the Company's common shares, subject to adjustment under certain circumstances. The Company is listed on the TSX Venture Exchange ("TSX") and is subject to a limitation on the number of options a company may have. The 2001 Plan provides for the issuance of both incentive stock options and nonqualified options as those terms are defined in theInternal Revenue Code of 1986, as amended (the "Code"). The Company's previous option plan will remain in effect until all granted stock options are exercised, expired or canceled. In February 2006, the Company adopted a new Stock Options Plan (the “2005 Plan”). The 2005 Plan authorizes the issuance of up to 13,900,000 of the Company's common shares, subject to adju stment under certain circumstances. The Company is listed on the TSX Venture Exchange ("TSX") and is subject to a limitation on the number of options a company may have. The 2005 Plan provides for the issuance of both incentive stock options and nonqualified options as those terms are defined in theInternal Revenue Code of 1986, as amended (the "Code"). The Company's previous option plan will remain in effect until all granted stock options are exercised, expired or canceled. |
A summary of the status of the Company's options and changes during the years is presented below: |
F-19
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31 | 2005 | 2004 | 2003 | ||||
Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | ||
Outstanding at beginning of year | 5,000,000 | $0.25 | 25,000 | $0.50 | 25,000 | $0.50 | |
Granted | 7,935,000 | $0.10 | 5,000,000 | $0.25 | - 0 - | $0.00 | |
Exercised | 150,000 | $0.25 | - 0 - | $0.00 | - 0 - | $0.00 | |
Cancelled/expired | -0- | $0.00 | (25,000) | $0.50 | - 0 - | $0.00 | |
Outstanding at end of year | 12,785,000 | $0.10 | 5,000,000 | $0.25 | 25,000 | $0.50 | |
Options exercisable at year end | 12,785,000 | 5,000,000 | 25,000 | ||||
Weighted average fair value of options granted during the year | $0.10 | $0.19 | $0.50 |
The following table summarizes information about fixed stock options outstanding at December 31, 2005: |
F-20
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options Outstanding | Options Exercisable | |||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighed Average Exercise Price | |
$0.10 | 12,785,000 | 1.45 | $0.10 | 12,785,000 | $0.10 | |
Warrants to purchase shares of common stock are as follows: |
Year ended December 31, | 2005 | 2004 | 2003 | ||||
Number of Warrants | Range of Exercise Price | Number of Warrants | Range of Exercise Price | Number of Warrants | Range of Exercise Price | ||
Outstanding at beginning of year | 5,407,000 | $0.0657 - $0.195 | 17,431,000 | $0.064 - $0.1175 | 21,800,000 | $0.064 - $0.80 | |
Issued | 12,875,000 | $0.055 - $0.130 | 1,250,000 | $0.135 - $0.195 | 8,750,000 | $0.0657-$0.1175 | |
Exercised | (1,613,000) | $0.0657 - $0.1175 | (13,214,000) | $0.64 - $0.255 | (3,476,000) | $0.064 - $0.26 | |
Expired | (2,630,000) | $0.075 - $0.1175 | (60,000) | $0.085 | (9,643,000) | $0.26 - $0.66 | |
Outstanding at end of year | 14,039,000 | $0.055 - $0.195 | 5,407,000 | $0.0657 - $0.195 | 17,431,000 | $0.064 - $0.1175 | |
Warrants issued in 2005 and 2004 have a contractual life of two years from the date of issuance. |
11. INCOME TAXES: | As of December 31, 2005 the Company had deferred tax assets resulting primarily from net operating loss carryforwards of approximately $26,000,000, which are available to offset future taxable income, if any, through 2025. As utilization of the net operating loss carryforwards is not assured, a 100% valuation allowance has been provided. The components of the net deferred tax assets are as follows: |
December 31, | 2005 | 2004 | |
Net operating loss carryforwards | $ 8,824,000 | $ 8,517,000 | |
Valuation allowance | (8,824,000) | (8,517,000) | |
Net deferred tax assets | $ - 0 - | $ - 0 - | |
F-21
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the effective income tax rate to the federal statutory rate are as follows: |
Year ended December 31, | 2005 | 2004 | |
Federal statutory tax rate | 34% | 34% | |
Valuation allowance on net operating carryforwards | (34) | (34) | |
Effective income tax rate | - 0 - % | - 0 - % |
12. IMPAIRMENT OF LONG-LIVED ASSETS : | As the result of the Company’s inability to raise revenues in accordance with the corporate business plan, the Company operated at a loss for the year ended December 31, 2003. As a result, the Company commenced an impairment review of its long-lived assets in accordance with Statement of Financial Accounting Standard (‘SFAS”) 144 “Accounting of the Impairment or Disposal of Long-Lived Assets”. As a result of this impairment review, the Company recorded impairment losses of approximately $100,000 to reduce the carrying value of these assets to their estimated fair value. |
F-22
USA VIDEO INTERACTIVE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED): | The following table summarizes selected quarterly data for the years ended December 31, 2005 and 2004: |
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Full Year | ||
2004: | ||||||
Revenue | $ 4,700 | $ - 0 - | $ - 0 - | $ - 0 - | $ 4,700 | |
Expenses | (269,411) | (293,955) | (320,023) | (525,149) | (1,408,538) | |
Net Loss | (264,711) | (293,955) | (320,023) | (525,149) | (1,403,838) | |
Net loss per common share | ||||||
Basic and Diluted | $ (0.00) | $ (0.00) | $ (0.00) | $ (0.00) | $ (0.01) | |
2005: | ||||||
Revenue | $ 18,800 | $ - 0 - | $ - 0 - | $ - 0 - | $ 18,800 | |
Expenses | (280,507) | (217,840) | (233,776) | (244,927) | (977,050) | |
Net Loss | (261,707) | (217,840) | (233,776) | (244,927) | (958,250) | |
Net loss per common share | ||||||
Basic and Diluted | $ (0.00) | $ (0.00) | $ (0.00) | $ (0.00) | $ (0.01) |
Item 15. Exhibits, Financial Statements to Shareholders and Reports on Form 8-K.
(c)
Exhibits
31.1
Certification of the Chief Executive Officer Pursuant To Rule 13a-14 Or 15d-14 of theSecurities Exchange Act Of 1934,as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant To Rule 13a-14 Or 15d-14 of theSecurities Exchange Act of 1934,as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
USA VIDEO INTERACTIVE CORP.
By: /s/Edwin Molina
Date: March 23rd, 2006
Edwin Molina
Chief Executive Officer
